UK heads for whopping deficit on borrowing binge

Britain could be heading for a bigger budget deficit next year than crisis-hit Greece and Spain, according to research by Morgan Stanley.

Economists at the investment bank calculated that Britain’s budget deficit could total £126 billion ($195 billion), or 7.8 per cent of gross domestic product, in 2013-14.

That would make Britain’s the highest projected deficit in Europe. Morgan Stanley predicted that Greece’s would stand at 6.3 per cent and Spain’s at just under 6 per cent. The Office for Budget Responsibility predicted that Britain’s budget deficit could be £98 billion next year, or 5.9 per cent of GDP.

The forecasts underline the pressure on efforts made by Chancellor of the Exchequer
George Osborne
to cut the deficit. Official figures show that government borrowing for April 1 to August 31 – the first five months of the financial year – is running at more than 25 per cent over target.

In the five months to August, and excluding the one-off savings from the Royal Mail pension fund and the Bank of England’s special liquidity scheme, the government borrowed £61.3 billion – 26.7 per cent more than in the same period last year. The official borrowing target for the year is a rise of just 0.5 per cent .

Economists predicted that the bleak picture on borrowing threatened to undermine the Chancellor’s cast-iron fiscal rules. IHS Global Insight chief economist Howard Archer said: “It is likely in his autumn statement that he will either have to acknowledge that he will be unable to start bringing down debt as a percentage of GDP by 2015-16."

Morgan Stanley, which published its analysis before the most recent public sector borrowing figures were released, also predicted that at least one of Mr Osborne’s fiscal rules could be broken.

“It may be time for a ‘Plan C’ of sorts," said economists.

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“The ‘least worst’ option, we think, would be to stick to the existing austerity plans but make no attempt to repair the projected fiscal slippage and risk breaking at least one of the fiscal rules," they added.

The Treasury said the government was committed to its fiscal plan. “Though the economic climate is challenging, in August we borrowed less than the markets expected, and spending is on track for the year."

“The Office for National Statistics also revealed the deficit in 2011-12 was almost £7 billion lower than previously estimated, and down nearly £40 billion from two years ago."